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Posts Tagged ‘Great Recession

“The prevailing ideology of the modern west – which is political economy – is in the doghouse”*…

 

recession

 

This weekend marks the 10th anniversary of the collapse of Lehman Brothers (the largest bankruptcy in U.S.history) and the start of the Great Recession.  We took a look at the crisis, it’s dimensions, and its aftermath last month (“Not every business cycle has a financial crisis. Frequently they do“); but there’s so much to remember– and so many may smart folks from whom to learn…

In “From Trump to Trade, the Financial Crisis Still Resonates 10 Years Later,” Andrew Ross Sorkin thinks about the consequences of the crash still unfolding.  In “Can We Survive the Next Financial Crisis?,” Bloomberg’s Yalman Onaran, considers both the ways in which the system that led to the last crisis has become safer and also the pockets of risk that have grown since 2008.  (Keep your eyes on CLOs– collateralized loan obligations– this decade’s version of the CDOs that tanked the economy in 2008…)

The always-illuminating Matt Levine, considering John Cassidy’s review of Adam Tooze’s new history of the financial crisis/crises, Crashed, highlights Tooze’s central argument: that much of our current geopolitical situation — the nativism and fragmentation and general rejection of decades of stability and elite consensus — is a consequence of the 2008 financial crisis and the flawed response to it.  Levine concludes with a striking observation…

Finally here is a passage I found interesting from Tooze’s “Crashed,” on quantitative easing, political volatility, and the U.S.’s flirtation with defaulting on its debt in 2013:

That the astonishing events in Congress in 2013 did not lead to an immediate crisis in the bond market pointed to the resilience of the US Treasurys as the global safe asset of choice. Though the Chinese and Germans might complain and the market blipped, demand for US Treasurys quickly recovered. Ultimately, the market for IOUs drawn on the American taxpayer was underwritten by the Fed. Unlike the ECB, America’s central bank left no doubt that it backed its governments’s debt. QE3 bond purchases provided immediate support, keeping prices up and rates down. This provided at least one point of stability for global investors. But after the events of 2013 questions could no longer be avoided. Was one of the unintended side effects of the stability generated by the Fed to free politics from market constraints and thus enable Republican extremism? Did America’s ability to ride out short-term budget crises like those of 2011 and 2013 lead contemporaries to underestimate the future dangers that the degeneration of American democracy might bring with it? And how long would the Fed’s technocratic interventions compensate for America’s lackluster economic recovery and the shambles in the legislative branch?

Obviously one can disagree with some of the characterizations there. But one thing that we used to talk about a lot around here was that people were worried that people weren’t worried enough: Financial-market volatility seemed eerily low given the apparent instability of, you know, the world. That worry turned out to be overstated — volatility picked back up without causing any particular crisis — but it really was a bit eerie: Apparent actual volatility in the world kept not causing volatility in asset prices. But an implication of Tooze’s argument is that some of the causality went the other way: Because financial markets were calm in the face of geopolitical instability, they enabled more geopolitical instability. If you don’t have bond vigilantes checking up on you, then you can get up to a lot of weird stuff.

[image above: source]

* James Buchan

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As we try to keep cause and effect straight, we might recall that it was on this date in 1920 that the biggest incidence of domestic terrorism in U.S. history to that date occurred: the Wall Street bombing.  At noon, a horse-drawn wagon passed by lunchtime crowds on Wall Street and stopped across the street from the headquarters of the J.P. Morgan bank at 23 Wall Street, on the Financial District’s busiest corner.  Inside the wagon, 100 pounds of dynamite with 500 pounds of heavy, cast-iron sash weights exploded in a timer-set detonation, sending the weights tearing through the air.  30 people were killed immediately, and another eight died later of wounds sustained in the blast.  There were 143 seriously injured; the total number of injured was in the hundreds.

Though investigators and historians believe the bombing was carried out by Galleanists (an anarchist group responsible for a series of bombings the previous year), the attack– which was a part of postwar social unrest, labor struggles and anti-capitalist agitation in the U. S.– was never officially solved.

The aftermath of the explosion

source

 

Written by LW

September 16, 2018 at 1:01 am

“Not every business cycle has a financial crisis. Frequently they do.”*…

 

Your correspondent is headed away on his annual pilgrimage to the land of banked dunes and deep-fried delights.  Regular service will resume on or around August 27.  Vacations can be a time for retrospection.  In that spirit, an invitation to think about the last ten years…

 

2008

 

2008 was a big year: Senator Barack Obama was elected president of the United States,  “Satoshi Nakamoto” published “Bitcoin: A Peer-to-Peer Electronic Cash System,” SpaceX became the first private, commercial company to put an object into earth orbit, China wowed the world with its host ceremonies for the Summer Olympic Games…  But of course, 2008 was also the start of the Great Recession…  which was bad.  Really bad:

Total U.S. household net worth dropped by $11.1 trillion in 2008.

The median income for 25-to-34-year-olds in America, $34,000, hasn’t budged since 1977, adjusted for inflation.

Median household wealth collapsed.
2007: $126k
2016: $97k

The number of Americans worried about the economy multiplied nearly sixfold.
2007: 16 percent
2008: 86 percent

In 2016, the median wealth of a family headed by someone born in the 1980s was 34 percent below the level of earlier generations at the same 2007: age.

Mutual funds lost a third of their value: -38 percent.

The market value of all publicly traded companies was cut in half.
October 2007: $63 trillion
March 2009: $28.6 trillion

From 2005 to 2009, the median value of stocks and mutual funds owned by whites dropped by 9 percent.

The median value of holdings for African-Americans dropped by 71 percent (probably because of pressure to sell when prices were low).

Between 2007 and 2013, wages declined for the bottom 70 percent of all workers.

The retirement savings of black families fell by 35 percent from 2007 to 2010.

In a 2016 survey by the Fed, 28 percentof working-age adults said they had no retirement savings whatsoever.

The racial wealth gap, already large, ballooned.
Whites: $171k
Hispanics:  $20.7k
African-Americans: $17.6k

In terms of household wealth, every group suffered — but some more than others.
Hispanics: -66 percent
Asian-Americans: -54 percent
African-Americans: -53 percent
Whites: -16 percent

Consumer credit-card debt at the end of 2017 was over $1 trillion (about 30% higher than in 2008).

Millennials have taken on at least 300 percent more student-loan debt than their parents’ generation.

The unemployed took many more weeks to find work.
May 2008: 7.9
June 2010: 25.2

In a December 2017 poll by YouGov, 38 percent of those surveyed said they didn’t know when they’d be debt-free. 30 percent of respondents thought they’d never be out of debt.

63 percent of Americans say they don’t have enough money in savings to cover a $500 health-care expense.

In 2017, women had nearly 500,000 fewer babies than in 2007, although there were 7 percent more women of prime childbearing age.

The suicide rate rose 4 percent from 1999 to 2010: 4,750 additional deaths.

24 million adult millennials, or 32 percent, still live at home.

79 million Americans live in a “shared household” with at least one extra, nonfamily resident.

More college grads moved in with their parents.
2005: 19 percent
2016: 28 percent

As of 2017, only 34.2 percent of homes have recovered their value from before the recession. (Still below 2008 value.)

From 2000 to 2015, homeownership declined in 90% of all U.S. metropolitan areas.

[source]

Frank Rich explores the lasting impact of that crash:

…the collapse of Lehman Brothers kicked off the Great Recession that proved to be a more lasting existential threat to America than the terrorist attack of seven Septembers earlier. The shadow it would cast is so dark that a decade later, even our current run of ostensible prosperity and peace does not mitigate the one conviction that still unites all Americans: Everything in the country is broken. Not just Washington, which failed to prevent the financial catastrophe and has done little to protect us from the next, but also race relations, health care, education, institutional religion, law enforcement, the physical infrastructure, the news media, the bedrock virtues of civility and community. Nearly everything has turned to crap, it seems, except Peak TV (for those who can afford it)…

Read the full essay: “In 2008, America Stopped Believing in the American Dream.”

Then consider Steve Bannon’s take on the same event:

The legacy of the financial crisis: Donald Trump. The legacy of the financial crisis is Donald J. Trump. And I can give you the specific moment: When they put Lehman in bankruptcy, and the geniuses didn’t understand that it was inextricably linked to the commercial paper market. Hank Paulson, Treasury secretary, and Ben Bernanke, the head of the Federal Reserve, they went to see Bush three days later. They told him, ‘We need a trillion dollars in cash, and we need it by five o’clock.’”

And in a profile of courage, President Bush says, “Not my problem. You gotta go to Capitol Hill.” They go up to Capitol Hill, they put everybody in a room. They make them all put their BlackBerrys outside, and they walk in, and Bernanke, who’s not an alarmist, says, “If we don’t have a trillion dollars by today, the American financial system will melt down in 72 hours. The world financial system will melt down in two weeks, and there will be global anarchy.”

And by the way, this was completely brought on by the elites of the country and Wall Street. When I got to Harvard Business School in 1983, a bunch of professors were coming up with a radical idea that’s had a horrible negative consequence on this country and to the fabric of our society: the maximization of shareholder value; this was preached as High Church theology. The whole thing of the financialization of Wall Street, of looking at people as pure commodities and of outsourcing and globalization, came from the business schools and the financial community that had these radical ideas, and nobody kept them in check…

I think you’re starting to see the deindustrialization of the country. We stopped investing in the country. Domestic investment’s all going over to China. We deindustrialized Western Europe. Brexit and 2016 are inextricably linked, okay?

Workers know this. It’s the labor vote in the midland counties that drove Brexit. This is what’s so obvious the Democratic Party misses. Donald Trump’s president because of working-class Democrats. The Trump movement is made up of people like my father, the Marty Bannons. My whole household was working-class Democrats. These are adamant Trump supporters because they understand Trump supports working-class people…

While the prescribed remedies may be wildly different as between the progressive writer and the Nativist provocateur, the diagnosis is eerily similar.  Read Bannon’s interview in full at “Steve Bannon on How 2008 Planted the Seed for the Trump Presidency.”

More perspectives on 2008 at “Ten Years After the Crash, We Are Still Living in the World It Brutally Remade.”

And lest we think too parochially, consider this argument that the Georgian War (Russia’s engagement in Georgia) in 2008 was (another) product of the same currents that yielded the financial crisis: “The Turning Point of 2008“… which, in turn, helped spur the growth of Russia’s use of criminal hackers: “It’s our time to serve the Motherland.”

Kenneth Arrow

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As we make our way down memory lane, we might recall that it was on this date in 1945 that George Orwell’s allegory, Animal Farm– A Fairy Story, was published.  (The U.S. edition, published in 1946, dropped the sub-title.)   While it has never disappeared from conversation about politics and governance, Animal Farm is enjoying a renaissance in these increasingly Nativist times.  But while Orwell rings only too relevant these days, we might do well to keep in mind his friendly competitor (and one-time school master), Aldous Huxley, and Huxley’s Brave New World:

In his classic 1985 book Amusing Ourselves to Death, Neil Postman wrote of the difference between George Orwell’s and Aldous Huxley’s visions of fascism.

“Orwell feared those who would deprive us of information,” wrote Postman. “Huxley feared those who would give us so much that we would be reduced to passivity and egoism. Orwell feared that the truth would be concealed from us. Huxley feared the truth would be drowned in a sea of irrelevance.”

More at “Amusing Ourselves to Trump.”

For a nifty cartoon version of the Orwell-Huxley distinction, see here.

And for a further exploration of this modern day Scylla and Charybdis, see “Orwell feared that what we fear will ruin us. Huxley feared that what we desire will ruin us.”

220px-Animal_Farm_-_1st_edition

First edition cover

source

 

“Optimism is highly valued, socially and in the market; people and firms reward the providers of dangerously misleading information more than they reward truth tellers”*…

 

43073849241_23eaff519b_z

 

It’s been 10 years since the beginning of the Great Recession…

Some of the more pessimistic commentators at the time of the credit crunch, myself included, said that the aftermath of the crash would dominate our economic and political lives for at least ten years. What I wasn’t expecting – what I don’t think anyone was expecting – was that ten years would go by quite so fast. At the start of 2008, Gordon Brown was prime minister of the United Kingdom, George W. Bush was president of the United States, and only politics wonks had ever heard of the junior senator from Illinois; Nicolas Sarkozy was president of France, Hu Jintao was general secretary of the Chinese Communist Party, Ken Livingstone was mayor of London, MySpace was the biggest social network, and the central bank interest rate in the UK was 5.5 per cent.

It is sometimes said that the odds you could get on Leicester winning the Premiership in 2016 was the single most mispriced bet in the history of bookmaking: 5000 to 1. To put that in perspective, the odds on the Loch Ness monster being found are a bizarrely low 500 to 1. (Another 5000 to 1 bet offered by William Hill is that Barack Obama will play cricket for England. I’d advise against that punt.) Nonetheless, 5000 to 1 pales in comparison with the odds you would have got in 2008 on a future world in which Donald Trump was president, Theresa May was prime minister, Britain had voted to leave the European Union, and Jeremy Corbyn was leader of the Labour Party – which to many close observers of Labour politics is actually the least likely thing on that list. The common factor explaining all these phenomena is, I would argue, the credit crunch and, especially, the Great Recession that followed…

The always-illuminating John Lanchester ponders what happened, why, and what we have– and haven’t– learned: “After the Fall.”

[image above: source]

* “However, optimism is highly valued, socially and in the market; people and firms reward the providers of dangerously misleading information more than they reward truth tellers. One of the lessons of the financial crisis that led to the Great Recession is that there are periods in which competition, among experts and among organizations, creates powerful forces that favor a collective blindness to risk and uncertainty.”   – Daniel Kahneman, Thinking, Fast and Slow

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As we do our best to learn from our mistakes, we might wish a spectacularly happy birthday to Phineas Taylor (“P.T.”) Barnum; he was born on this date in 1810.

A sharp observer of the human condition, Barnum wrote and spoke frequently of characteristics that made “promotions” of the sort in which he specialized both possible and profitable:

Nobody ever lost a dollar by underestimating the taste of the American public.

There’s a sucker born every minute.

In what business is there not humbug?

Barnum came by his wisdom the round-about way: he founded and ran a small business, then a weekly newspaper in his native Connecticut before leaving for New York City and the entertainment business.  He parlayed a variety troop and a “curiosities” museum (featuring the ‘”Feejee” mermaid’ and “General Tom Thumb”) into a fortune…  which he lost in a series of legal setbacks.  He replenished his stores by touring as a temperance speaker, then served as a Connecticut State legislator and as Mayor of Bridgeport (a role in which he introduced gas lighting and founded the Bridgeport hospital)… It wasn’t until after his 60th birthday that he turned to endeavor for which he’s best remembered– the circus.

“I am a showman by profession…and all the gilding shall make nothing else of me.”

source: Library of Congress

 

Written by LW

July 5, 2018 at 1:01 am

“Anyone who lives within their means suffers from a lack of imagination”*…

 

Modern Monetary Theory’s basic principle seems blindingly obvious: Under a fiat currency system, a government can print as much money as it likes. As long as country can mobilize the necessary real resources of labor, machinery, and raw materials, it can provide public services. Our fear of deficits, according to MMT, comes from a profound misunderstanding of the nature of money.

Every five-year-old understands money. It’s what you give the nice lady before she hands you the ice cream cone—an object with intrinsic value that can be redeemed for goods or services. Through the lens of Modern Monetary Theory, however, a dollar is nothing but a liability issued by the US government, which promises to accept it back in payment of taxes. The dollar in your pocket represents a debt owed you by the federal government. Money isn’t a lump of gold but rather an IOU.

This mildly metaphysical distinction ends up having huge practical consequences. It means the federal government, unlike you and me, can’t run out of cash. It can run out of things money can buy—which will drive up their price and be manifest in inflation—but it can’t run out of money. As Sam Levey, a graduate student in economics who tweets under the name Deficit Owls told me, “Macy’s can’t run out of Macy’s gift certificates.”

Especially for those who want the government to provide more services to citizens, this is a convincing argument, and one that can be understood by non-economists…

Everyone knows governments need to tax before they can spend. What Modern Monetary Theory presupposes is, maybe they don’t.  Offered for interest (and with no endorsement): “The Radical Theory That the Government Has Unlimited Money.”

* Oscar Wilde

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As we crank up the printing press, we might recall that it was on this date in 2009, several months into the Great Recession, President Barack Obama met with the CEOs of America’s 13 largest financial institutions to discuss a path out of the economic trough onto which the U.S. had descended.  Finding them suspicious of his new (Democratic) administration and worried that he would be less generous to their companies than President Bush and his administration had been, Obama opened by suggesting…

My administration is the only thing between you and the pitchforks… But you need to show that you get that this is a crisis and that everyone has to make some sacrifices…I’m not out there to go after you. I’m protecting you. But if I’m going to shield you from public and congressional anger, you have to give me something to work with on these issues of compensation. Help me help you Everybody has to pitch in. We’re all in this together.

The result was a series of compromises that survived the Obama Administration, but that are now being systematically undone under the Trump Administration.

See also “13 Bankers.”

Kenneth D. Lewis, the chief executive of Bank of America, with other bank executives outside the White House after the meeting with President Obama

source

 

Written by LW

March 27, 2018 at 1:01 am

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